Key Takeaways

  • LLCs must follow naming rules, file Articles of Organization, and designate a registered agent.
  • Federal taxation varies based on LLC classification: sole proprietorship, partnership, or corporation.
  • State tax obligations include annual franchise taxes and income-based fees that differ by jurisdiction.
  • LLCs must now comply with the Corporate Transparency Act’s Beneficial Ownership Information (BOI) reporting.
  • In California, additional forms and fees apply, including Form 568 and the LLC annual tax.

LLC Rules

The rules for LLC are the regulations you will have to abide by if you want to legally run your limited liability company. There are many LLC rules that vary from state to state, but there are some rules that are in force in all fifty states. These rules mostly pertain to LLC creation and LLC taxation.

Rules for LLC Creation

When creating your LLC, there are rules that must be followed to complete this process properly. Such rules pertain to:

  • Naming the LLC. An LLC name cannot be the same as another LLC registered in the state, it cannot have forbidden or restricted words unless authorized to do so, and it must have some variation of the term “Limited Liability Company” in it.
  • Registered agents. An LLC must have a registered agent or an individual or business that serves and receives legal papers on behalf of the LLC. This registered agent must be a resident of the state or a business authorized to do business in the state, and either must have a physical street address in the state.
  • Articles of Organization. These must be filed with the Secretary of State or a similar office in order to finalize your LLC’s existence. Articles of Organization should include such details as your LLC’s name, address, and type of business; your name and signature; your registered agent’s name and address; and the names and address of other LLC members, if there are any. There will also be a filing fee that must be paid, its amount varying by state.
  • Publishing a public notice. Some states require aspiring LLC owners to publish their intention to form an LLC several times in their local paper in the weeks before they file their Articles of Organization. Once this is done, an affidavit of publication must be sent to the LLC filing office.
  • Obtaining permits and licenses. Some businesses require permits and/or licenses before they can be legally run. What licenses are required will vary by state and community. The U.S. Small Business Administration keeps information pertaining to the required permits and licenses.
  • Adhering to employment laws. If you plan on hiring employees, you must obtain an EIN, or employer identification number, from the IRS. You should also be sure to meet all state laws related to employee hiring.

Beneficial Ownership Information (BOI) Reporting

As of January 1, 2024, most LLCs are required to file a Beneficial Ownership Information (BOI) report with the Financial Crimes Enforcement Network (FinCEN), as mandated by the Corporate Transparency Act. This rule aims to enhance transparency and prevent the illicit use of shell companies.

Key requirements include:

  • Who must report: All domestic LLCs created by filing with a Secretary of State or foreign LLCs registered to do business in the U.S., unless exempt (e.g., large operating companies or regulated entities).
  • What to report: Names, birthdates, addresses, and identification numbers of beneficial owners—those who directly or indirectly own or control at least 25% of the company or exercise substantial control.
  • Deadlines:
    • LLCs formed before 2024: Must file by January 1, 2025.
    • LLCs formed in 2024: Must file within 90 calendar days of formation.
    • LLCs formed in 2025 and beyond: Must file within 30 calendar days of formation.
  • Updates: Any changes to the reported information must be filed within 30 days.

Failure to file can result in civil penalties of $500 per day and potential criminal penalties.

Rules for LLC Federal Taxation

Rules pertaining to LLC taxation on the federal level are fairly simple and mostly relate to how LLC taxes are to be filed, which depends on what form your LLC takes. These forms are:

  • Single-member LLC. You will file your taxes on Form 1040 Schedule C.
  • Multi-member LLC. You will file your taxes on the regular 1040 personal tax return.
  • LLC operating as a corporation. Form 1120 must be filed for the entire corporation. A Schedule K-1 detailing each member’s LLC profit and loss share is then sent out. The members then use this to complete Form 1040 with Schedule E attached. They must also estimate their tax total for the following year, making quarterly payments on this.

Aside from this, the other main rule to keep in mind pertaining to federal taxes is that LLC owners are considered being self-employed and thus must pay self-employment taxes, which cover Medicare and Social security, the amount of which is not withheld from their paychecks as it would be if they were regular employees. The current self-employment tax rate is 15.3%.

Electing Federal Tax Classification

An LLC is considered a disregarded entity by default for federal tax purposes—either a sole proprietorship (for single-member LLCs) or a partnership (for multi-member LLCs). However, LLCs can elect to be taxed as a corporation by filing Form 8832 with the IRS.

Further, LLCs can elect S corporation status by filing Form 2553, but this requires meeting additional IRS eligibility criteria, such as:

  • Having no more than 100 shareholders
  • All shareholders being U.S. individuals, certain trusts, or estates
  • Using a permissible tax year (typically a calendar year)

This election can reduce self-employment taxes for member-employees, though it involves stricter compliance requirements like reasonable compensation and payroll tax withholding.

Rules for LLC State Taxation

On the state level, some states may levy additional taxes against an LLC based on its income. For example, in California, LLCs making more than $250,000 annually must pay a tax ranging from $900 to $11,000, based on their income level above that threshold. Some states may also impose an annual, non-income related tax known as a franchise tax, annual registration fee, or renewal fee. The average amount for this is $100.

State-Specific LLC Tax Rules: California Example

LLC rules can vary significantly by state. In California, LLCs are subject to several tax and filing requirements administered by the Franchise Tax Board (FTB):

  1. Annual LLC Tax (Form 3522): A mandatory $800 tax due each year, even if the LLC is inactive or operates at a loss.
  2. LLC Fee (Form 568): Applies to LLCs with total income from California sources exceeding $250,000. The fee is based on gross receipts and ranges from $900 to $11,790.
  3. Estimated Fee (Form 3536): If your estimated income exceeds the $250,000 threshold, an estimated payment must be made.
  4. Due Dates:
    • Form 3522 is due by the 15th day of the 4th month after the beginning of the tax year.
    • Form 568 is due by the 15th day of the 4th month following the end of the LLC’s tax year.
  5. Waivers: The $800 annual tax is waived for LLCs formed in 2021-2025 for their first tax year, provided they qualify under California’s startup waiver program.

Other LLC Rules

Other LLC rules not related to creation and taxation that one should keep in mind include:

  • LLCs that offer professional services, such as the services of lawyers, doctors, and accountants, must be known as PLLCs limited liability companies.
  • Some business types, like insurance companies, cannot operate as LLCs.
  • LLCs must dissolve if their ownership changes unless specific provisions are made against this in the Articles of Organization or the LLC adopts an S corporation structure.
  • LLCs must specify how long they will operate in most states. Usually, the maximum is between 30 and 40 years.

Internal Operating Procedures and Formalities

While LLCs are generally less formal than corporations, adhering to certain internal governance rules can prevent legal disputes and help maintain limited liability protection.

Best practices include:

  • Adopting an Operating Agreement: Even if not required by the state, this document outlines the roles of members and managers, voting rights, distribution of profits, and procedures for adding or removing members.
  • Holding Regular Meetings: While not mandatory in most states, annual or quarterly meetings can reinforce the legitimacy of the business entity.
  • Record-Keeping: Maintain clear records of member contributions, meeting minutes (if applicable), major decisions, and financial records.
  • Avoiding Commingling of Funds: LLC members should use separate business bank accounts and credit cards to avoid piercing the corporate veil.

Frequently Asked Questions

  1. What are the main LLC rules I need to follow?
    You must comply with state-specific formation, naming, taxation, and reporting requirements. Federally, you must choose how your LLC is taxed and possibly report beneficial ownership.
  2. What is the BOI report and who must file it?
    The BOI report discloses ownership details to FinCEN under the Corporate Transparency Act. Most LLCs must file unless exempt.
  3. Do LLCs have to pay taxes at the state level?
    Yes. Many states impose annual taxes or fees. For example, California charges an $800 annual tax and an income-based LLC fee.
  4. Can an LLC be taxed as a corporation?
    Yes. LLCs can elect corporate taxation using IRS Form 8832, or elect S corp status with Form 2553, if they meet eligibility criteria.
  5. Is an Operating Agreement required?
    Not in all states, but it’s highly recommended to establish internal rules and protect members’ rights.

If you need help with the rules for LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.